Swap spreads tightened five or six basis points last week on the widely reported news that both Fannie Mae and Freddie Mac would finally bow down to congressional pressure and provide greater transparency to their operations and improve their borrowing profiles by issuing subordinated debt.

The majority of mortgage-backed players saw this development as a long time coming, and overwhelmingly thought that the MBS market will receive this in a positive light.

"The uncertainty around Fannie and Freddie, and the threat of pulling the Treasury line of credit was a real negative for the market," said Dale Westhoff, a managing director of MBS at Bear, Stearns & Co. "We feel that that cloud is lifting somewhat, and this most recent development will be a real positive as we move into the end of the fiscal year.

"Investors didn't know what to make of all the controversy this year regarding the GSEs and Baker's request for more oversight. So any movement towards removing that uncertainty is a real positive."

"There's no doubt, this is a very good thing for the GSEs, in terms of avoiding any type of averse action by Congress," added Art Frank, the head of MBS research at Nomura Securities. "Even Baker conceded that it is a meaningful first step."

Some market players were not surprised, and saw the trend of more disclosure and transparency as something that has been developing for a very long time.

"The reaction to the controversy started to soften, in terms of people's perception, long before this," noted Steven Point, an MBS investor at The Glenmede Trust Company. "I think it affected the equity markets more than anything else. Agency debt snapped in a little bit on the news, but that's not a surprise."

The core argument that got Baker some support was that Fannie and Freddie were supposedly getting too risky for the American taxpayer. "I think they laid that to rest pretty effectively today, with their issuance of subordinated debt and their move to capital being 4% of assets. That will be very good for GSE credit quality," Frank said.

While spread product tightened on the news of the agreement between Baker and the GSEs, some market players felt that by the GSEs opening themselves up to rating agency scrutiny, spreads will ultimately widen out again.

"The GSE paper usually trades as a strong single-A or weak double-A paper," said one MBS analyst. "But after this increased scrutiny, spreads are bound to gap back out."

Rep. Banker held a press conference last Thursday to announce additional disclosures the GSEs would be implementing.

Clearly ecstatic over the progress made, he said that when he introduced the GSE Reform effort, he had two goals. One was to improve market transparency and the other was to reform the regulatory structure.

His first goal has been achieved. He congratulated the GSEs on setting the highest and best standards of conduct in the world which will benefit taxpayers and borrowers. Sen. Gramm is also supportive of this agreement.

The Chairman and CEO of Fannie Mae, Franklin Raines, said the changes that will be implented not only made the GSEs "more safe and more sound" entities, but these changes set a "vanguard for worldwide standards and practives."

FHLMC Chairman and CEO, Leland Brendsel, noted that the capital risk management and disclosures statements are unmatched in the financial realm and will be a model for other financial institutions. These enhancements, he noted, puts to rest any questions regarding the safety and soundness of the GSEs.

Pimco's Gross: Strange Timing?

Some market sources noted that the head of Pimco, William Gross, was recently out talking up Ginnie Mae bonds just as the GSE/Baker compromise was hitting the news last week, leading some observers to question the odd timing of Gross' comments.

"It is curious that Bill Gross was out talking to the press about how much he loves Ginnie Mae just before all is happy with Baker and the agencies," said one investor.

"If you try to defend your position or you're already long agencies or if you make a final exit strategy on Ginnies, it wouldn't hurt your position to talk up Ginnies," another source noted. "Especially on the eve of all being well with Baker and the GSEs, coupled with not having any special reason to like Ginnies."

Gross had gone on record several times in the last month saying that Ginnie bonds were the place to be, particularly in the federal debt is to go away.

"Why go on record right before things clear up [between the GSEs and Baker]?" the investor said.

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